Trounces the Stock Market? Try 2 Out of 2,862 Funds
Minh Uong/The New York Times
When the stock market rose 30 percent in 2013, plenty of fund managers
had a triumphant year.
anyone can post good numbers in a bull market, though. It’s like
sprinting downhill with the wind at your back: The chances are good
that you’ll be pleased with your own performance.
Outperforming most other people consistently, year in and year out, is
obviously a much more difficult feat, in any competition. But how rare
is it, exactly, for stock market investing?
study by S.&P. Dow Jones Indices has some fresh and startling answers.
The study, “Does
Past Performance Matter? The Persistence Scorecard,”
provides new arguments for investing in passively managed index funds
— those that merely try to match market returns, not beat them.
won’t end the debate over active versus passive investing, because it
also shows that a small number of active investors do manage to turn
in remarkably good streaks for fairly long periods.
performance in recent years. It found that very few funds have been
consistently outstanding performers, and it corroborated the adage
that past performance doesn’t guarantee future returns.
S.&P. Dow Jones team looked at 2,862 mutual funds that had been
operating for at least 12 months as of March 2010. Those funds were
all broad, actively managed domestic stock funds. (The study excluded
narrowly focused sector funds and leveraged funds that, essentially,
used borrowed money to magnify their returns.)
team selected the 25 percent of funds with the best performance over
the 12 months through March 2010. Then the analysts asked how many of
those funds — those in the top quarter for the original 12-month
period — actually remained in the top quarter for the four succeeding
12-month periods through March 2014.
answer was a vanishingly small number: Just 0.07 percent of the
initial 2,862 funds managed to achieve top-quartile performance for
those five successive years. If you do the math, that works out to
just two funds. Put another way, 99.93 percent, or 2,860 of the 2,862
funds, failed the test.
The study sliced and diced the mutual fund universe in a number of
other ways, too, each time finding the same core truth: Very few funds
achieved consistent and persistent outperformance. Furthermore,
sustained outperformance declined rapidly over time. And the report
said, “The data shows a likelihood for the best-performing funds to
become the worst-performing funds and vice versa.”
should investors make of these findings? There is one clear
implication, said Keith Loggie, senior director of global research and
design at S.&P. Dow Jones Indices.
very difficult for active fund managers to consistently outperform
their peers and remain in the top quartile of performance over long
periods of time,” he said. “There is no evidence that a fund that
outperforms in one period, or even over several consecutive periods,
has any greater likelihood than other funds of outperforming in the
seems to bolster the case for index-fund investing. After all, if a
fund manager with a great year can’t be counted on to outperform other
fund managers later, it’s reasonable to ask: Why bother trying to beat
the market at all?
series of annual S.&P. Dow Jones studies
has found that over extended periods, the average actively managed
fund lags the average index fund. All of this may be enough to
persuade you to abandon actively managed funds entirely.
the story is more complex than that: The study also demonstrates that
active managers can actually beat the market. Remember those two funds
that did so consistently over the five years through March? The study
didn’t identify them, but at my request Mr. Loggie did.
were the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund,
which were also the top two general domestic funds over the last five
years through June, according to Morningstar performance rankings
conducted recently for The New York Times.
fund has rewarded shareholders spectacularly, turning a $10,000
investment to $35,000 over those five years, the Morningstar data
shows. By contrast, the same investment in a Standard & Poor’s
500-stock index fund would have become more than $23,000. While hardly
shabby, that’s not nearly as good.
called the managers of the two funds. Both had good things to say
about index funds, and about their own brand of investing.
Hodges, manager of the family-run
Hodges Small Cap
fund, said that index funds are fine for many people, but that the
intensive scrutiny his team applies to the often-neglected small- and
midcap parts of the market should enable the fund to outperform the
overall market in the future. “We won’t do it all the time, of
course,” he said. “We’ll have bad times. We’ll make mistakes. But over
the long run, I think we can keep doing very well.”
Michael W. Cook, the lead manager of the
SouthernSun Small Cap
fund and the founder of the firm that runs it, had a similarly nuanced
funds deserve to be core holdings for many investors, he said, and
despite his own fund’s exceptional record, it may not be a good choice
thing you don’t want to do is just read about performance numbers —
ours or anybody else’s — and put money into an investment,” he said.
“Chasing past returns doesn’t make sense.”
is crucial, Mr. Cook said. Before putting money into a fund like his,
he said, ask yourself: Do you really need more small-cap stocks in
your portfolio? These smaller companies can be volatile, and they may
well decline in price. Janet L. Yellen, the Federal Reserve
chairwoman, warned last week of “stretched” valuations for small-cap
said, Mr. Cook spoke with the conviction of a true believer about
patient, shoe-leather stock-picking discipline. He looks to buy shares
in “businesses that we can own for a lifetime,” he said. “We spend a
lot of time understanding businesses we buy. And we keep checking them
and their competitors and their industries. We need to really
Cook has closed his fund to new investors so that he can maintain
control over the portfolio’s quality, he said. If the fund eventually
reopens, and you want to consider investing in it, he said, “You
shouldn’t expect that we’ll perform at the very top every quarter — we
won’t do that, I’m pretty sure.” He said that he was happy about the
last five years, but that they didn’t prove much.
the long haul, which is probably 50 years or more, he said, he will
look back at his fund’s track record, and he hopes he will be able to
conclude: “We had a good approach. We worked hard and we did well for
meantime, though, past performance doesn’t guarantee future returns.
A version of this article appears in print on July 20, 2014, on page
BU6 of the New York edition with the headline: Who Routinely Trounces
the Market ? Try 2 Out of 2,862.
© 2015 The
New York Times Company